INFLATED CURRENCY.

Otago Daily Times, Issue 17943, 24 May 1920, Page 7

INFLATED CURRENCY.

EDITOR. Sib, —It is impossible for anyone to judge of the. soundness of Mr Gilkigon'e proposed . remedy for an inflated currency without a technical knowledge of the Pmisli monetary system. Our currency, ie supposed to rest upon a gold foundation. If such wae actually a. fact, no inflation could be possible, aa every pound note in circulation would! then, havo a gold sovereign behind it. Long before the war broke out, however, our • currency had become inflated by a steady ex- , pansion of " bank money" (credit), which. . implies tie absence of all metallio money. '. Pew people realise to what an exient bank . money has surreptitiously Bupplanted gold. In 1913, when the trade of the United Kingdom amounted to more than a thousand million sterling per ' annum, the actual!, amount of gold currency was only 1J per cent., the remaining 98J per cent, of trade being conducted by cheques, bills, etc. ' Aβ the ' purchasing power of the sovereign commenced to decline abofit 1896 tho inflation of the British currency was in process for 18 yeara before the war broke out. An uicxease in the volume of bank money beyond tho legitimate limit, regulated by the natural increase of both population and production, ifl fatal to industrial peace. It has exactly the eame resulte aa follow from l the' Government issuing an ■unlimited inconvertible paper currency. An over-issue- of money .can .only produce > higher prices with a corresponding fall in purchasing power. Since 9S| per cent, of too total vojume o£ British trade previous to tho war was transacted without any gold basis, the war can only have caused the disappearance of 1J per cent, of gold from circulation. This shows us that we must go deeper and beyond war financo for an explanation of nn inflated currency. ~ The English Government and its financiftlt advisers would not be guilty of inflating the currency by openly issuing . bank notes. Such clumsy methods are resorted to only by crude'financiers who cannot foresee that tho effect will directly, recoil upon themselves. The British system l , of financing the war, instead of being undertaken by tho Government, wias undertajcerj by British banking institutions co-operating oa , behalf of the nation. Tha owr-ieeue in tho currency has consequently made its ippeorance in the form of private bank notes with Government security instead of gold , behind! them. Tho total removal of tho gold standard, which was only a partial check previous to the war, has not only accelerated andi accentuated tho rise in prices but has resulted in a situation in which the Government has sheltered itesdf behindl the actions , ..of . the banke, and the banks again have sheltiwred! themselvee bcliind tbe actions of the Government, Jeaving " Nemesis" to bo faced, by tiho community at large. ... No prudent Government would over iave consented to a. suspension of the gold standard such as - has inflated tho note issue im Now Zealand from £2,00(5,000 in 1914 to S&fiG&fi&l in 1918—an increase in four years o£ " over 200 per oont. This inflated liability Mr Gilkison proposes to remove by "tie State buying all tho gold mince in ihe dominion, and working them, or, failing this, by tho ' Government increasing the .price of gold to £6 per oz, or higher if necessary." Now if it ba assumed for argument , a sake that'wo α-clopt Mr Gilkison'e proposals, it would not have the- slightest effect in reducing the volume of inflated currency. The replacing of the paper pound noto by a gold sovereign would not increase it* purchasing power, for the g-okl pounds would dwaippcar na faet aa they were- put in circulation. With gold at £6 per oz every sovereign in the possession of tho banks within Now Zealand-supposed to be some £2.000,000-woUJd be increased in ' valuo by 50 per cent. Mt Gilkison wouldl very generously present £1,000,000 to tho eis banks operating in New Zealand at the pnb-' iln 9^3^! 01,60 }$ fl n,ere stTOko °f the pen What the public requires from Mr Gilkieon is an explanation of how he would proceed to rudtaoe the inflated currency if he were' in possession-of five million golden sovereigns", equally the amount of inflated curre-ncv notee - : issued m Ne-w Zealand since the oommeju*. ment ox the war. Thero can be no inflation' m tho currency without a riao in price* thin' being m fact the vieiblo manifestation of ' inflation. Conversely there can bo no restoration of tho currency to its true lovol until ; there has bo?n a reduction in prices. To effect th-.s is tho problem tiat confronte ua and approachee Uβ with increasing rapidity ■ An economist would say that the eolu-tiori ' lies in ft readjustment of veltiee to a level similar to ihe prices ruling m> to, 165)6. In that year tho pownd sterling haV! readied its frroatcet purcliasing power, which indicated] that the volume of money in circulation Baluncod with tho inore«,Bo in population ana! production.—l am, etc.,

W. SnraBTSEH , , J